Stoop Co. owned 80% of the common stock of Knight Co. Stoop had 50,000 share of

Question

Stoop Co. owned 80% of the common stock of Knight Co. Stoop had 50,000 share of $1 par value common stock and 2,000 shares of convertible preferred stock outstanding. Each share of preferred stock received an annual per share dividend of $10 and is convertible into four shares of common stock.

Knight had 25,000 shares of $5 par value common stock. Knight also had 300 convertible bonds outstanding, each of which is convertible into ten shares of common stock. Knight's annual after-tax interest expense for the bonds was $11,000. Stoop owns 20% of the Knight's bonds.

Stock warrants to buy 10,000 shares of Knight are also outstanding. For $20, each warrant can be converted into one share of Knight’s common stock. The fair value of this stock is $25. Stoop holds none of these warrants.

Stoop reported income of $400,000 for 2015 for its own operation, which did not include
equity income from Knight. Knight reported income of $150,000 for 2015.There is no amortization expense resulting from acquisition-date excess fair value.

For this business combination, calculate the consolidated Basic Earnings Per Share (EPS) and Diluted EPS for 2015.

Explanation / Answer

Basic EPS = Profit or Loss attributable to common equity holders / Weighted average no. of common shares o/s

Diluted EPS = (Profit or Loss attributable to common equity holders + After tax interest on convertible debt +

                     Convertible preferred dividend) / (Weighted average common shares o/s + All diluted common stock)

                              Stoop                       Knight

Common Stock                                                                                       50000             25000

Common Stock owned by Stoop 80% of Knight                     20000 (20000)

Convertible preferred stock    8000    -

Convertible Bonds -    3000

Convertible bonds owned by Stoop 20% of Knight          600    (600)   

                                                                                                            78600                        7400   

Income from operations                                                                         $400000                 $150000

(-) Dividend                                                                                            ($20000)                     -

(-) After tax interest expense                                                                        -                       ($11000)

(-) Interest expense belongs to Stoop from Knight                                        ($2200)                 $2200    

               Total Profit $377800 $141200   

Basic EPS                                                                                       $377800 / 70000     $141200 / 5000

                                                                                                          = $5.40                    = $28.24

Diluted EPS $422200/ 78600       $158800/ 7400

   = $5.37 = $21.46

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